1 Retail REIT to Buy, 2 to Watch

Real Estate Investment Trusts (REITs) play a significant role in the retail sector. Despite an uncertain economic scenario, retail sales held steady last month. The retail sector’s resilience and solid outlook guarantee retailers with healthy cash flows and, in turn, would benefit retail REITs who make the most money from the rent they charge from tenants.

Hence, investing in fundamentally sound retail REIT Saul Centers, Inc. (BFS) could be wise for steady returns. Investors could also monitor EPR Properties (EPR) and Urstadt Biddle Properties Inc. (UBA) for better entry points in these stocks.

Let’s understand this in detail.

Inflation moderated last month, marking the 11th consecutive monthly decline. The year-over-year rate dropped from 4.9% to 4%. However, core inflation, a more reliable underlying inflation gauge, remained high at an annual rate of 5.3%. It increased by 0.4% in May, maintaining a consistent monthly average of 0.4% throughout 2023.

Despite signs of slowing down, inflation “remains well above” the Fed’s 2% target. Fed Chairman Jerome Powell clarified that the current pause in rate hikes is a temporary break rather than a signal of the central bank concluding its tightening cycle. In fact, he has emphasized the probability of further interest rate increases.

During uncertain economic conditions, investors can secure a stable income stream by investing in REITs. REITs distribute a minimum of 90% of taxable income as dividends annually. Notably, roughly 24% of REIT investments are in retail, representing the largest investment category in the United States.

Retail REITs own, operate, and manage retail real estate and rent space in these properties to tenants. Retail REITs comprise REITs that focus on regional malls, shopping centers, outlet centers, and power centers that feature big-box retailers. Despite the surge in e-commerce, several retailers need physical retail space to serve their customers best.

Moreover, the outlook of the retail industry appears bright amid stable consumer spending. Retail sales, both in-store and online, increased by 0.3% in May compared to April. Furthermore, the retail trade association projects retail sales to grow between 4% and 6% this year, reaching a range of $5.13 trillion to $5.23 trillion.

Growing retail sales benefit the retail REIT industry as they bolster the demand for retail properties, which boosts occupancy rates and opens the door to potential rental income growth.

On top of it, according to Technavio, the global REIT market is anticipated to expand at a CAGR of 2.8% to $333.01 billion by 2027, with North America contributing 63% to the global market growth.

Given the industry’s positive outlook, investing in fundamentally sound retail REIT BFS could be wise. Meanwhile, investors could keep an eye on EPR and UBA and wait for a better entry point in these stocks.

Let’s discuss the featured stocks in detail.

Stock to Buy:

Saul Centers, Inc. (BFS)

BFS is a self-administered equity REIT that operates and manages a real estate portfolio of 61 properties. This includes 50 community and neighborhood shopping centers and seven mixed-use properties totaling approximately 9.8 million square feet of leasable area, along with four land and development properties.

On June 22, BFS declared a $0.59 quarterly dividend on its common stock, payable on July 31, 2023, to shareholders of record on July 17, 2023. BFS pays a $2.36 per share dividend annually, translating to a 6.63% yield on the current price level. Its four-year average dividend yield is 5.42%, and its dividend payouts have grown at a 3.6% CAGR over the past three years.

For the first quarter that ended March 31, 2023, BFS’ revenue increased 1.5% year-over-year to $63.05 million. Its net income and per share net income available to common stockholders grew 1.3% and 2.3% year-over-over to $10.70 million and $0.45, respectively.

Also, as of March 31, 2023, the company’s total assets stood at $1.87 billion, compared to $1.83 billion as of December 31, 2022.

The consensus revenue estimate of $255.35 million for the fiscal year (ending December 2023) reflects a 3.9% year-over-year improvement. Likewise, the consensus FFO estimate of $3.04 for the ongoing year indicates marginal year-over-year growth. The stock gained 2% intraday to close the last trading session at $35.60.

BFS’ solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

BFS has a B grade for Stability and Sentiment. It has topped the 30-stock REITs - Retail industry.

In addition to the POWR Ratings I’ve just highlighted, you can see BFS’ ratings for Growth, Value, Momentum, and Quality here.

Stocks to Watch:

EPR Properties (EPR)

EPR is a leading diversified experiential net lease REIT specializing in enduring experiential properties. It focuses on real estate venues that enhance out-of-home leisure and recreation experiences, attracting consumers who spend discretionary time and money. The company operates in 44 states with assets worth $5.80 billion.

On June 15, EPR declared a monthly dividend of $0.275 per common share, payable on July 17, 2023, to shareholders of record on June 30, 2023. EPR pays a $3.30 per share dividend annually, translating to a 7.55% yield on the current price level. The company’s four-year average dividend yield is 6.36%.

For the first quarter that ended March 31, 2023, EPR’s revenue increased 8.8% year-over-year to $171.40 million. Its adjusted EBITDAre grew 9.9% from the year-ago value to $135.48 million.

Furthermore, the company’s Adjusted Funds From Operations (AFFO) and AFFO per common share rose 12.4% and 12.1% year-over-year to $98.73 million and $1.30, respectively.

Analysts expect EPR’s revenue to decrease 4.8% year-over-year to $152.77 million for the second quarter ending June 2023. However, the company’s FFO for the current quarter is expected to grow 6.6% from the prior year’s period to $1.25. Also, EPR topped its consensus revenue and FFO estimates in all four trailing quarters, which is impressive.

Shares of EPR have gained 14% over the past six months to close the last trading session at $43.69.

EPR’s outlook is reflected in its POWR Ratings. The stock has a B grade for Quality. It has ranked #2 out of 30 stocks within the REITs - Retail industry.

Click here to access additional EPR ratings (Momentum and Sentiment). 

Urstadt Biddle Properties Inc. (UBA)

UBA acquires, owns, and manages commercial real estate. It operates through two segments, Ridgeway and All Other Operating. The company holds ownership or equity interests in more than 77 properties, totaling around 5.3 million square feet of gross leasable area.

On June 1, UBA declared quarterly dividends on the company’s class A common stock and common stock, with each share of class A common stock receiving $0.2083 and each share of common stock receiving $0.1875. The dividends are payable on July 6, 2023, to stockholders of record on June 14, 2023.

Also, on May 18, UBA and Regency Centers Corporation (REG) announced their definitive merger agreement in which REG would acquire UBA in an all-stock transaction worth around $1.40 billion. REG is a renowned leader in owning and operating top-tier shopping centers nationwide.

Willing L. Biddle, President and CEO of UBA, said, "I have no doubt that our portfolio will be in great hands under Regency leadership, and as a future Regency shareholder I look forward to the scale and platform benefits that the combination of our two companies will provide.”

UBA pays a $0.83 per share dividend annually, translating to a 4.16% yield on the current price level. Its dividend payouts have grown at a 2.2% CAGR over the past three years, and its four-year average dividend yield is 5.35%.

For the six months that ended April 30, 2023, UBA’s revenue increased 2.5% year-over-year to $73.37 million. Its operating income rose 2.1% from the prior year’s period to $26.74 million.

Also, the company’s FFO applicable to common and class A common stockholders grew 5.7% year-over-year to $28.70 million, while FFO per common share came in at $0.69, reflecting a 7.9% year-over-year increase.

UBA’s revenue is expected to grow 2.4% year-over-year to $146.46 million for the fiscal year ending October 2023. The company’s FFO is expected to come in at $1.54 for the current year, indicating a 4.8% rise year-over-year. Over the past year, the stock has gained 22.5% to close the last trading session at $20.02.

It’s no surprise that UBA has a B grade for Stability and Sentiment. It has ranked #3 out of 30 stocks within the same industry.

Click here to access additional UBA ratings for Growth, Value, Momentum, and Quality.

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EPR shares were trading at $44.54 per share on Monday afternoon, up $0.85 (+1.95%). Year-to-date, EPR has gained 22.18%, versus a 13.89% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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